Micromanaging the Economy

The problem of our economy is that consumers are not consuming, borrowers are not borrowing, lenders are not lending and investors are not investing, explains MR Venkatesh

Imagine for a moment a train from your town to Kochi and ending up in distant Ahmedabad. Successive Union Budgets have been doing precisely that; probably far worse. Government misses Revenue targets by a mile and exceeds its expenditure by another.

The net result? The Fiscal Deficit – the indicator of the net borrowing by the Government to fund its expenditure – exceeds the budget target. But who cares? Definitely not the mandarins in Finance Ministry.

Fiscal Consolidation has been a narrative in successive Budgets. “In a globalised world with its share of uncertainties and rapid changes, this year brought us some opportunities and many challenges as we moved ahead with steady steps on the chosen path of fiscal consolidation and high economic growth.”

No, that is not Finance Minister Jaitley speaking. That was the then Finance Minister Pranab Mukherjee referring to the issue of fiscal consolidation in his Budget speech of 2011-2012 [Refer Para 1] which estimated a fiscal deficit of 4.6 per cent but finally ended up with 5.9 per cent for financial year 2011-2012. So much for Fiscal Consolidation.

Crucially, no one in the Finance Ministry ever hauled over the coals for missing any budgetary targets. Remember that 2011-12 was not an exception. In fact the golden rule is that the Budget numbers are to be taken probably with a pinch of salt. Now let us come to the current year. The mid-term review of the economy for the current year was published by the Finance Ministry on December 19, 2014. It states that the fiscal policy of 2014-2015 was fashioned with two objectives: one to aid growth revival and two, to “continue” [emphasis mine] on the path of fiscal consolidation – yes the very same path followed by Pranab Mukherjee and P Chidambram.

I have two objections to the word continue. First, there was not much of fiscal consolidation under UPA regime for the incumbent Government to “continue.” Second, even assuming for a moment that UPA was indeed having a programme for fiscal consolidation, let us not forget that mandate 2014 was for a univocal change and not for maintaining status quo. Be that as it may, the fact of the matter is that the mid-term review for 2014-2015 points out that as against a budgeted estimates of Rs 5.31 lakh crores, the fiscal deficit till September 30 was Rs 4.39 lakh crores. This works to approximately 83 per cent of the budgeted deficit for the entire year.

In other words 83 per cent of the fiscal deficit has been exceeded in the first six months! Definitely at half way the warning signs are on. Further, this document brings about an explanation as to why the Budgeted numbers will probably not achieved during the current year. Claiming that the revenue projections were a by-product of overestimation, the review points out probably revenues will be short by approximately Rs 105,000 crores. To this extent, the Fiscal deficit will probably be higher.

Lack of Managerial Bandwidth
That brings me to the first objective of this year’s Budget – that of reviving growth – which by its own admission has not yet happened. Surely, all this must worry the Government. The Index of Industrial Production (IIP) for October 2014 is a case in point which suggests that industrial growth has witnessed a contraction of 4.2 per cent when compared to October 2013.

In terms of industries, 16 out of the 22 industry groups in manufacturing sector have shown negative growth during October 2014 as compared to October 2013. Similarly, the Consumer durables and Consumer non-durables have recorded a growth of (-) 35 per cent and (-) 4.3 per cent respectively during the same period. October being the month of festivals, often witnesses a surge in sale of such goods.

Yet, if we are witnessing such dramatic fall in numbers. Similarly, the capital goods industry – the barometer of oncoming investments – is also in negative territory. But why? Well most in the North Block are clueless.

Likewise, as I write this, one of the dramatic macro-economic developments in recent months have been the decline in inflation numbers. The mid-term review of the Government observes that these developments were “unanticipated.” Put simply, it had no faith in its own policy that the inflation numbers would go down!

If only the former Finance Minister P Chidambaram were in office, he would have appropriated credit for this paradigm lock, stock and barrel. Nevertheless, such innocence demonstrates that the NDA Government is still on a learning curve.
It is in this connection the mid-term review of the economy states: “even as recently as September 2014 the RBI’s projection for January 2015 was 7.4 per cent, representing as over-estimate of nearly 200 basis points. The same was true for most financial market assessments.”

One of the reasons attributed for this dramatic fall in inflation rates is the decline in international commodity prices, especially that of crude. Importantly, no one within the Government is clear as to why crude is falling in first place.
That explains why the RBI as well as most within the Government have been caught flat-footed on this dramatic decline in commodity prices, mostly oil.

Remember, if crude can fall from USD 110 to less than 60 per barrel in a matter of weeks, it can rise too in a jiffy. And if Budget assumes international prices of oil at 110 or 60, barring divine intervention, surely it is going to be way of the mark.

Re-engineering growth
There is another dimension to this problem. It is estimated that approximately Rs 18 lakh crores are locked in stalled projects [aggregating to approximately 13 per cent of the GDP] of which an estimated 60 per cent are in infrastructure. According to the mid-term review of the economy, “this reflects low and declining corporate profitability as more than one-third firms have an interest coverage ratio of less than one.”

At an average of 70 per cent debt-equity ratio, Indian corporates are one of the highly indebted in the entire world. As project after project gets stalled for one reason or the other corporates find they are without incomes. Consequently, losses mount and corporates are unable to repay to their loans.

This in turn is now affecting the banking sector. The mid-term review of the economy estimates that 11-12 per cent of the total banking assets are restructured.

Importantly, banks are becoming increasingly risk-averse and hence are unwilling to lend afresh.

This in turn is affecting growth. But where is the question of fresh lending when past lending are stuck? Whatever be it this is the legacy of the UPA Government and continues to be a challenge for the incumbent Government.

Naturally, the first task for the NDA Government is to address the issues faced by the staled projects referred to above. Remember, that there is no one size fit all solution for all this. On the contrary, we need to approach on a case to case basis. We need to customise solutions.

But to do so, do we have a managerial bandwidth? Does the bureaucracy have the necessary gravitas to provide such solutions on a case to case basis? Do they have the attention span to diagnose? Can they provide solutions? Can they differentiate the wilful defaulter from one who is a victim of circumstances?

My guess is as good as yours.

The reasons for such stalling range are as varied as judicial interference to NGO activism. Some are due to bottlenecks in fuel supply which this Government is surely addressing. But on most one feels that the rot is far deeper than on superficial inspection.

Unless the FM himself gears to deal with the subject, the economy may well continue to be on a downward spiral. And unless the stalled projects are de-stalled fresh projects would not be undertaken. That would postpone the new investment cycle.

What is worrying analysts is that as such projects are caught in a policy paralysis the Balance Sheet of our Banks continue to bleed. For too long has the RBI along with some of the public sector banks been guilty of window dressing their balance sheets.

Remember a meltdown of a public sector bank can have serious consequences on the economy and our currency. For too long Analysts, Rating agency and Auditors of these banks have been able to see the emperor’s cloths when none exists. And should someone somewhere point out that the emperor is indeed without cloths, all hell will break loose.
In short, the problems of our economy is that consumers are not consuming, borrowers are not borrowing, lenders are not lending and investors are not investing.

Surely, it is a huge mess out there.

North Block as a whole does not have solutions. At best it hopes that revival will be “unanticipated” – not by its interventions or policies. Simultaneously, the Government must realise India does not require big bang reforms.
Rather it requires simple micro-management of the economy.

But does the Government have managers to micro-manage the economy? For starters, it must de-stall the projects stalled. To do so it must micro-manage. But has it got managerial bandwidth for this exercise?